With regards to the EBA Implementing Technical Standard and specifically to the NPE exit criteria we would like to ask for your advice on how to handle the following case:
Customer A is a performing exposure. Account 3 presents 91 dpd and as a result the whole customer is classified as NPE. Account 1 and 2 are classified as such due to contagion.
Customer A - Performing exposure
Account Balance % on total Days past due NPE
Account 1 50 5% 0 50
Account 2 100 10% 0 100
Account 3 850 85% 91 850
1.000 100% 1.000
On the other hand Customer A is now a non performing exposure. It presents arrears over 90 dpd in an immaterial account i.e. account which is < 20% of the total customer balances.
Customer A - Non performing exposure
Account Balance % on total Days past due Performing - 1st option Performing - 2nd option
Account 1 50 5% 91 0 0
Account 2 100 10% 0 0 100
Account 3 850 85% 0 0 850
1.000 100% 0 950
The question is should we upgrade Accounts 2 and 3 into performing, leaving Account 1 as an NPE or the whole exposure retated to the customer must remain as NPE? Please always assume that the customer is not impaired and no concerns regarding the full repayment of the debt exists. Based on paragraph 156 of the EBA ITS, the first option is valid, however this is not in line with the NPE entry criteria. In our opinion the second option is the correct one.
Practical examples provided in the Question field
The treatment of the exposure would depend on whether case 2 is sequential in time to case 1, or it is an alternative, standalone situation.
If the cases are sequential in time, then in accordance with paragraph 213 a) of annex V to Regulation n°680/2014 (ITS on Supervisory reporting) all the exposures to the debtor shall be classified as non-performing exposures under the «debtor approach» since the past due exposure seems to be material on the basis of the threshold fixed by the national competent authority.
In case of the «transaction approach», all the exposures shall be classified as non performing only if the pulling effect has been satisfied.
Once the exposures have been classified as non performing, a reclassification as performing is possible only where all the conditions described in paragraph 228 are met. In the case above mentioned the condition in paragraph 228 lett c) is not met when the exposures have been classified under the «debtor approach» and hence all the exposures still remain in the non performing category. However, under the «transaction approach», the condition in paragraph 228 lett (c) is not required because according paragraph 226 the classification shall be done «on an individual basis» and thus, as the pulling effect is no longer satisfied, accounts 2 and 3 could be classified as performing exposures.
If case 2 is not a continuation of case 1, then« Customer A – Non performing exposure », exposure under account 1 shall be classified as a non-performing exposure as
- it is more than 90 days past due as per article 213 (a) of annex V to Regulation n°680/2014 (ITS on Supervisory reporting)
- it is a material exposure. Article 216 of Annex V states that material exposures referred to in above-mentioned article 213 (a) are assessed according to article 178 of CRR (in this regard, the Commission Delegated Regulation (EU) 2018/171 states that the date of application of the materiality threshold shall be applied no later than 31 December 2020).
On the one hand, under the «debtor approach», exposures under accounts 2 and 3 shall be also classified as non-performing because in accordance with paragraph 226, the classification applies «for the overall exposure to a given debtor».
On the other hand, under the «transaction approach», exposures under accounts 2 and 3 do not meet the default criteria in accordance with article 178 of CRR and shall be classified as performing exposures according to article 213. In addition, in that specific case, article 227 of Annex V, does not apply as account 1 defaulting exposure does not represent more than 20% of the gross carrying amount of the debtor total exposures, hence the whole exposures of debtor A (accounts 1 to 3) cannot be classified as non-performing exposure.